It’s always a challenge keeping dental practice costs to a minimum.

Paying close attention to the finer details in your dental office lease agreement when starting a practice or approaching your lease renewal or expiry date is important for keeping practice costs low and protecting yourself from financial disasters down the line. Here are 5 lease negotiation tips a dentist can follow to help control practice costs and avoid financial traps in the long run.

1. Capping Rental Escalations

• Your “Annual Base Rent” is the amount that you agree (or agreed) to pay your landlord for occupying the dental office space. 
• Securing reasonable rental rates when you open your practice, or at renewal time, will help you remain profitable as your practice grows. 
• Tip: Try to protect rental rates and unreasonable escalations by negotiating a cap on annual rental escalations with your landlord. 

2. Options to Extend

• The “option to extend” provision in the dental office lease provides tenants the ability to extend their tenancy in the building under the same agreed-upon terms in the lease agreement. 
• Key Term: The “extension deadline” is the last day that you may exercise your option to extend the lease term. 
• Benefit: Negotiating “options” into your lease can protect you from rental escalations and provide you with the flexibility to stay in your space, even if the landlord has other plans for the space at the end of your term. 

3. Understanding Operating Costs

• Operating costs are the expenses related to the operation and running of the building. 
• Tip: Ensure that you have the right to review/audit statements of operating costs written in your lease agreement, affording you the transparency of knowing exactly what you’re being charged for. 
• Warning: Some landlords have been known to pass on various unreasonable expenses to their tenants, filing them under the term “operating costs.” 

Examples of Unreasonable Expenses: 

• Improvements were made to the property to increase its value. 
• Building repairs. 
• Real estate broker commissions. 
• Professional fees that are unrelated to your unit. 
• Interest or principal payments on mortgages or debt costs (unless it is your debt or TIA – tenant improvement allowance). 
• Common Area Maintenance (CAM) charges on vacant space in the building. 
• Marketing fees that do not increase traffic to the building and do not help your business. 
• Administration Fees: Ensure you’re not overpaying administration fees. Anything over 5% is unreasonable. Also, be aware that “administration fees” and “management fees” mean the same thing; make sure you’re not being charged twice. 

4. “Surrendering” the Space at Sale Time

• Any dentist who has built out a dental clinic from scratch knows firsthand that converting an empty space into a functioning dental practice is expensive. 
• It is typical for dentists to spend up to $100 – $400 dollars per square foot to build a new dental office, easily amounting to hundreds of thousands of dollars. 
• Long-term Consideration: When you decide to relocate, retire, or sell the practice, the Surrender clause in your lease agreement will dictate how you are to leave the space when you exit the premises. 
• Tip: To avoid the expensive costs related to the demolition and construction of the space, try to negotiate the wording of the “Surrender of Premises” clause in your lease to release you from the liability of having to restore the space back to its original shell condition (base building standards) when you vacate. 

5. Work With Dental Office Lease Negotiators

Benefits of Professional Negotiators 

• Engaging professional dental office lease negotiators can provide significant advantages. 

• These experts understand the intricacies of lease agreements and can help you secure the best terms. 

Market Research Expertise 

• Find rental rates for buildings in your area & local market demographics. 
• Resource: Cirrus Consulting Group has access to commercial market real estate data such as vacancy rates and rental rates. Schedule a complimentary rent analysis to see how your rental rates compare to similar properties in your neighborhood. 

These are just some of the ways to lower lease costs and protect yourself from expensive traps in the dental office lease. However, the best way to ensure that your lease is set up with economic and risk-free terms is to have the agreement reviewed by professional Dental Office Lease Negotiators before you sign or renew it. Negotiating a healthy lease now could prevent you from paying more later. 

When it comes to establishing a dental practice, one of the most critical decisions you’ll face is whether to buy or lease your office space.

Each option has its own set of advantages and disadvantages, impacting your financial risk, flexibility, and long-term business goals. This article explores the key factors to consider in the buy vs. lease debate for dental office spaces.

Buying Commercial Space

Property Ownership Pros and Cons

Buying a building or other commercial space provides flexibility over how to use the space, and the freedom to control the property, as you are, in essence, your own landlord. You also have the opportunity to build real estate equity. These are the primary benefits of buying.

On the other hand, buying commercial real estate comes with its own disadvantages and risks. First and foremost, buying a practice requires a large up-front financial investment. You will be taking on quite a lot of debt in the form of a mortgage, and of course there are risks associated with any real estate investment.

A dentist who purchases will also acquire a great deal more responsibility, and as a landlord/property manager, increased duties and obligations will take time and concentration away from the core business of dentistry.

Protecting Company “A” and Company “B”

Acquiring a commercial property is expensive and comes with certain liabilities. It is recommended to keep your real estate investment and dental practice as separate business entities so that it’s not “the dental practice” that is buying the real estate. This helps to maximize the value of each, and also separates the applicable responsibilities and liabilities. A properly structured dental office lease agreement should be created between the two businesses to provide further protection. This will be important should either be sold in the future.

Selling as a Property Owner

At the time of retirement/transitioning, a dentist who has purchased the property of their dental office either transitions into a landlord or sells the property. However,  it’s often quite difficult to sell the dental practice and the real estate property to one buyer.

In the case of a dentist who leases their office space, as long as assignment provisions are well-negotiated in the dental office lease agreement before signing it, they will have the flexibility to sell their dental practice or transition out of it by transferring the practice to another dentist, risk and hassle-free.

Leasing Your Dental Office Space

Location, Location, Location.

Leasing a space for your dental practice is an ideal option for many reasons. First, location is a critical factor in the success of a dental practice. In many cases, the best locations may not have purchase opportunities. Buying may require you to select from a less desirable or lower-trafficked area, and ultimately, a less profitable location. Leasing may therefore be the best option for the success of your dental practice.

Inherent Flexibility

Leasing dental office space also gives you the flexibility to move, if needed. Although relocating a dental practice is expensive and not the most feasible route, there may be situations where it makes the most sense for your personal and professional goals. Perhaps the community/location has changed over the years and the demographic is no longer ideal for your practice. What if your business plans have changed you want to expand and require more operatories/treatment rooms? What about property depreciation and external influences that change over time?

Whatever the reasons may be, they were likely unknown to you at the time of signing your dental office lease agreement, making it important to fully understand the terms of your lease. With leasing, you could have the flexibility to move based on changes to your practice goals and the terms in your dental office lease agreement.

Working Capital

Buying real estate for your dental practice will tie up significant capital that could otherwise be used towards building out your practice, purchasing dental equipment, marketing, hiring/training staff, etc. Leasing a dental office space can alleviate the stress of some of these and other startup costs, allowing you to become profitable sooner. Consider whether investing in business development for your core business, the dental practice, will yield higher returns than investing in real estate.

Evaluating Buying vs. Leasing Dental Office Space

As you review the pros and cons of buying vs. leasing dental office space, you must also consider the stage of your dental practice, your future business plans, the financial resources available to you, and your comfort level with risk. Commercial real estate investments are certainly an added complexity that will shift capital, time, energy, and other resources away from your core business practice. By carefully weighing these factors and seeking professional advice, you can make an informed decision that supports the long-term success and profitability of your dental practice.

Questions about your dental office lease or upcoming negotiation?
Contact us for a personalized lease chat below.

Imagine arriving at your dental practice to find a notice from your landlord stating that the building will be undergoing redevelopment, your office lease is being terminated, and you have 30 days to vacate the premises.

Your first thought is “there’s no way this can be real. My landlord would not, could not, and cannot legally get away with this”. Wrong.

Reality Check

This very real and common scenario is a result of the landlord exercising their right to demolish the space as outlined in the “Demolition Clause” in your dental office lease. This clause permits your landlord to relocate your practice or terminate your lease if they decide to demolish, renovate, or redevelop the building or center you are practicing in. Often the definitions of “redevelop”, “demolish” or “alter” in the lease are highly ambiguous.

So, what is the cost associated with relocating and rebuilding your practice from scratch?  Hundreds of thousands of dollars in unexpected, financially crippling costs; numbers large enough to demolish not only the building, but your practice’s livelihood and pose as a major inconvenience to your patients.

The Devastating Impact of the Demolition Clause to Your Business

• Lease Termination and Eviction: In the event your landlord exercises this clause, terminates your lease and evicts you, you have very little time to figure out next steps. You have to find a new dental practice location, build it out, and move everything within a certain time frame. Expensive, stressful, and very damaging to your patient roster. Every day that your dental practice is closed before the new location is open for operations is a significant loss in revenue to your business.
• Heavy Relocation Costs: If your landlord exercises the Demolition Clause and chooses to relocate you to a new area in the building or center to make way for renovations, you may be required to pay for the entire move yourself! As you can imagine, the costs associated with moving a dental practice are astronomical, and will include moving dental equipment, hiring movers, renovations and build out costs in the new location, marketing, updating signage, stationary materials, and more. If these fees are your responsibility, the financial impact to your dental practice could easily put you out of business.
• Increase in Rent: If your practice is relocated to a more visible and desirable location in the center, you could face an increase in dental office rent due to upgraded real estate. In addition, if the new space is larger than your current office you may have to pay for the difference in square footage.
• Difficulty Finding a Comparable Location: On the contrary to the above, there is no guarantee that the size of your next location will be comparable to the original premises. If it’s smaller, you will have to downsize, reconfigure your practice layout and operatories, and ultimately suffer a loss in patient traffic and production. Your new practice location may also be in a spot with less foot traffic and passersby, leading to a loss in new patient flow.
• Competition: If your new location is in close proximity to a competitor (i.e. another General Dentist), then you could experience a negative impact on your ability to attract and retain patients and staff.
• Accessibility: It’s important that your new dental office location be accessible to your clients with ample parking and wheelchair accessibility.
• Barriers to Selling Your Practice: The presence of a Demolition Clause in your dental office lease can act as a major obstacle when the time comes to sell your dental practice. Potential buyers will be reluctant to purchase the practice due to the risks involved, and financial institutions may also choose not to finance you or a new buyer for the same reasons. The “Demo Clause” essentially eliminates the safety and predictability of the lease term. Banks and financing companies view Demolition Clauses as highly risky and often will not finance a dental practice acquisition with this clause present.

Negotiating the Demolition Clause in the Dental Office Lease

It is in your best interest to avoid signing a dental office lease with this clause present altogether, or at least attempt to have it removed. If the clause already exists in your lease, or your landlord won’t remove the clause and you still choose to move forward, there are ways to amend it so it works more to your advantage.

• Landlord Pays for Relocation Costs: If the landlord chooses to relocate you, put the onus on the landlord to pay for all costs associated with the move or the demolition of your office space, including covering demolition/construction costs, real estate fees, moving expenses, marketing, and other costs.
• Time Constraints: Try to negotiate time constraints that apply to the landlord for activating the Demolition Clause; the later the better. For example, maybe the clause can only be exercised 5 years or 10 years into the lease term.
• Increasing Notice Terms: How much advanced notice will you be given to exit the space? Consider the amount of time required to relocate or rebuild your practice without having to rush into a new space that is not ideal. There is a big difference between having 30 days to vacate and 9 months to a year to vacate. Having time on your side before you are required to exit equals more time to find an ideal location and re-build your practice.
• Terms of Activation: Ask your landlord how much of the building will need to be renovated or redeveloped to activate the Demolition Clause. For example, perhaps it can only be invoked if more than half of the property is affected by the rebuild.
• Proof of Demolition: What proof should your landlord be required to provide you with upon the activation of the Demolition Clause? You want to ensure that the reason for eviction is because your landlord is rebuilding or demolishing the building. Common examples of proof include architectural drawings and building permits. This evidence ensures that your landlord is honest and is not evicting you from you dental practice needlessly, or for a reason other than a planned demolition or rebuild.
• Lease Termination Rights: In the event you are relocated and you do not like the space you are being relocated to, you should have the right written in to terminate the lease.
• Compensation: If the landlord invokes the right to terminate your dental office lease based on a redevelopment, they should be legally obligated to either pay to move you, or to pay for your unamortized leaseholds.

Huge Risk and No Reward for Your Dental Practice

The disruption to your practice, loss of business, and moving expenses associated with the Demolition Clause can easily make or break a flourishing practice. Due to the grave costs and risks involved, it is in your best interest to avoid signing a lease with a Demolition Clause in it. If this isn’t possible, try negotiating this clause so that the onus is on the landlord to pay for any related expenses.

Don’t jeopardize your practice’s future by putting yourself at the mercy of the Demolition Clause. Ensure you carefully review the details of your dental office lease before renewal or opening a practice to ensure your business is protected now and in the future from this clause.

Questions about your dental office lease or the “Demolition Clause”? Sign up for your personalized lease consultation with a Cirrus expert below to ensure that your business is protected.

 MEET DR. JIM BROWN…

Dr. Brown has been associating for several years, and is now ready to branch out and open his own dental practice. He’s found a location in a busy retail center, nestled in a residential neighborhood with no competing dentists in the vicinity; he’s in great shape to begin a long and fruitful career.

The doctor is presented with the dental office lease for the space by the prospective landlord, a 60 page agreement outlining the details of his tenancy for the duration of the term.

PAUSE.

Listen close, because this is important. The dental office lease is one of the most expensive contracts you will ever sign in your career as a dentist. Engineered by landlords to maximize the value of their properties, the lease is comprised of dangerous, hidden language that gives them many unfair privileges, putting you at risk for their financial gain.

Details in the lease and their adverse, binding effects on a practice are never taught to any of us in dental school, however, the success of our business and ability to function, grow and compete in the marketplace are governed by them. Reviewing the lease for risks is a critical first step in opening a successful practice.

THE BEGINNING OF THE END

Without reviewing or understanding the details in the lease, Dr. Brown makes the same, honest mistake that thousands of dentists make every day; he accepts the landlord’s offer “as is”, and signs off on a ten year lease term without any idea of how the details within will jeopardize his practice in the years to come.

New Neighbors

In year 1 of his new practice, Dr. Brown sees a steady flow of walk-in traffic and is happy with overall business. Unfortunately, a significant problem arises when his landlord moves a new neighbor in next door; another general dentist. Dr. Brown tries to complain but is quickly silenced; his office lease contains no “exclusivity language” that prevents the landlord from moving competing dentists into the building. As expected, Dr. Brown sees a lull in business and his appointment book begins to thin.

Useless “Use”

Dr. Brown decides he’ll compete by bringing in an associate to offer orthodontic and implant work. Unfortunately, this solution is short-lived when he’s informed that “use provisions” in the lease prevent Dr. Brown from practicing of any other form of dentistry in the space (other than general dentistry), in addition to prohibiting him from bringing in associates. Shedding a single tear, the landlord abruptly informs him that “crying in the space is also a prohibited”.

You’re Moving Me, Where!?

In year 2, Dr. Brown gets a notice from the landlord that he’s being relocated to suite B3, a smaller office in the mall basement with no windows and non-existent foot-traffic near the 24-hour liquor store. He must relocate his dental practice within 30 days and all moving expenses including build-out of the new space are entirely his financial responsibility.

The doctor pulls out the lease to review the “relocation clause”, horrified to learn that the landlord has full rights to move him under these circumstances. Trapped, flabbergasted and with nowhere to go but suite B3, the doctor begins packing up the office, clutching the nitrous oxide for good measure.

Caught Between the “Clock and a Hard Place”

In year 10, Dr. Brown gets a notice from the landlord that he’s missed the office lease expiry date and is now a month-to-month, or “overholding” tenant. He is presented with two options, (1) sign a new lease term at double the monthly rent, or (2), vacate the premises within 30 days. To make matters worse, the doctor has only 3 days to make a decision.

Feeling bullied, panicked and without options, the doctor renews the lease at the outrageous marked up rental rates and begins perusing the classifieds.

Seller Beware

10 Years later, the lease expiry date has arrived and the doctor has decided to sell the practice. He’s gotten the landlord’s permission to sell, found a buyer, and is ready to move on with his career.

Unfortunately the doctor suffers a rude awakening when he sees 50% of the practice sale proceeds go to the landlord, as outlined in the “assignment clause” in the dental office lease. Horrified, exhausted and truly defeated, Dr. Brown exits his dental practice of 20 years with nothing but regret and a frown.

PREVENTING THE PREVENTABLE

Dr. Brown’s fate is a common reality that hundreds of dentists face every day. The remedy? Review and understand the details in the dental office lease before singing it. A thorough lease review will expose these and other risks in advance, giving you the opportunity to prepare a lease negotiation strategy to negotiate them out and improve the lease to secure a good deal that supports your goals. Set yourself up for success with a lease that gives you the flexibility and long-term protection you need for a long and profitable career.

PROFESSIONAL OFFICE LEASE NEGOTIATION SERVICES

Cirrus Consulting Group specializes in commercial tenant representation and dental office lease negotiations for dentists. For 20 years, they’ve helped dentists across North America reduce risks and achieve favorable terms and rental rates in their dental office leases. They review the lease for problem areas and handle the entire dental lease negotiation from start to finish.

Protect your practice from expensive traps in your dental office lease and schedule your personalized leasing consultation with a leasing expert today.

Beyond Square Footage

Often, we consider square footage at face value. We reflect on that measured number – one that encompasses the space we occupy, its relativity to our monthly and annual rents, and thereafter very often move on, accepting that these rents are the reality of the space we’ll be occupying, period.

But the importance of square footage values far exceeds that usual conclusion. In fact, square footage amounts possess certain nuances that affect us beyond the size of our own space, encompassing shared spaces and “load factor”.

What’s the difference between Rentable and Useable square footage?

When we consider square footage, we often only think of the square footage amount we use – our own space, our own premises. The term useable square footage is therefore just that – the space you privately occupy from wall to wall.

So, why consider anything beyond that? In a multi-tenanted setting, within a building that isn’t your own and where you share certain parts of the building with other parties, there are considerations beyond your useable space. Very often, the terms useable and rentable square footage are used interchangeably – while these two concepts are actually quite different, they are, in fact, used together in marriage to make up your rental rates and therefore both apply significantly to an understanding of your monthly billings when leasing space in a commercial building.

Rentable square footage embeds an additional concept – it considers your useable square footage in addition to the amount of space you share with the rest of the building. Rents are often therefore charged against your rentable square footage amount – being the overall amount you benefit from, shared or not.

The Load Factor – What is it?

Commercial leases often encompass the concept of a load factor – the percentage of shared square footage within a commercial building which you pay for since you very likely benefit from that space – elevators, hallways, stairwells, mezzanines, the lobby, or other amenities the building may offer. The load factor is, essentially, tacked on to the amount you pay for your useable space.

For example, let’s consider Dr. Norma Green, a Veterinarian in downtown Manhattan. She currently rents out space in a dated building on West 72^nd Street, which encompasses a total of 15,000 square feet of both rentable and useable square footage. How, then, should she calculate the load factor added on to her useable square footage?

STEP ONE: First, take the total amount of the building’s square footage: 15,000

STEP TWO: Ask your landlord or landlord representative (very often a property manager or broker) to provide you with the amount of rentable square footage in the building. In Norma’s mid-town, middle-aged building, it’s 1,500 square feet.

STEP THREE: Then, subtract the building’s total square footage amount from the shared square footage amount in Step 2 to figure out the actual useable square footage in the building: 15,000 – 1,500 = 13,500 square feet is the actual, useable square footage in Norma’s building.

STEP FOUR: Finally, divide the building’s rentable square footage amount by the useable square footage amount. Here, 1,500 / 13,500 provide the load factor percentage amount: 11.1%.

This means that, on top of the monthly rents she pays for useable square footage, Norma is expected to pay for an additional 11.1% to account for the shared space she benefits from.

Why Does It Matter?

Load factors can vary by building – which means that, on a very practical level, two tenants who rent out space with the exact same square footage, at different buildings, could pay significantly differing rents based on the load factor present in each of their respective buildings.

Veterinarian Norma could rent out a 1,000 square foot veterinary space in the heart of downtown Manhattan with very minimal amenities, shared services and areas. Meanwhile,  another Veterinarian Kyle Anders could rent out a 1,000 square foot space down the street with a similar look, layout, number of operating/grooming rooms, and overall face value, but could pay significant more than Veterinarian Norma simply because of the greater number of shared bathrooms, convenient facilities and amenities available to Dr. Kyle, his staff, and customers, a beautiful, state-of-the-art, modern lobby with check-in concierge services – the list can go on.

This brings us to the very crux of day to day commercial leasing – that priorities of tenants can differ even if they work in the same industry, that leasing space may force you to reflect on commercial considerations far beyond your square footage amount and the space you occupy. Veterinarian Norma may not put significant weight on the lobby her customers walk into, while Veterinarian Kyle puts major, significant weight and importance on his branding, his clientele, what his customers first see when they walk into the space, and the look of his practice beyond the walls of his animal clinic.

For many veterinarian, doctors, and dentists, useable square footage (and how it affects the layout of the clinic) is what matters, period. But, priorities can differ by tenant, even if these tenants operate out of the very same industry – considering elements beyond the number of operatory rooms in your clinic is perfectly understandable, normal, and even encouraged, depending on the long-term objectives of your practice. Commercial leasing therefore possesses many nuances to consider beyond what you pay per square foot per month, and it’s important to lease space that fits you, your priorities, and how you wish to approach the growth of your business.

The Negotiation

When leasing commercial space and negotiating its related lease documentation, conversations can certainly go beyond the topic of rental rates. In fact, limiting yourself to the consideration of rent alone could possibly do a disservice to the development and growth of your business. In addition, load factors are not a static number – in fact, in some circumstances, landlords may be willing to negotiate or adjust the load factor requested during a lease negotiation or renewal.

Cirrus Consulting Group has over 20 years of experience negotiating with landlords across North America. Consider hiring professional negotiators to help you determine whether a space fits your desired long-term business objectives, create a properly structured lease agreement for you, and discuss the nuances of your square footage.

About the Author

Barbara de Dios, B.A. LL.B | Legal Counsel, Canadian Dental Services

Barbara de Dios is Corporate Counsel at Canadian Dental Services Corporation. Prior to joining CDS, she worked as Associate Lawyer at Cirrus Consulting Group, working on behalf of clients across North America in connection to the review, drafting, and negotiation of commercial lease agreements in various states and provinces. She has also worked as associate counsel for a capital markets and investment company based in downtown Toronto, specializing in corporate governance and general corporate/commercial law, where she also previously completed her articles. Barbara graduated from the University of Toronto and earned her legal degree from the University of Birmingham. She was called to the Ontario bar in September 2016.

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Picture this. Your name is Amanda Black. A few years after graduating veterinary school, you purchase a veterinary clinic from a retiring veterinarian at the edge of town. As part of the transaction, you enter into a lease assignment for the space – you list yourself, Amanda Black, D.V.M., as tenant to the lease. From this point forward, you run your clinic from a fairly deserted plaza at the edge of your beloved city.  Months pass, traffic to your clinic isn’t the best and, after a year or two in business, you begrudgingly conclude that business isn’t doing as well as you hoped. Cash flow is tight, and, ultimately, you reach the point where you miss more than a few rent payments. You default on your lease. Your landlord comes to collect and, lo and behold, the realities of a tenancy held personally show its true colors. Your personal liability is at the forefront and, unfortunately, your landlord reaches out to you (and to your personal assets) to collect on what’s owed.

A circumstance where your personal assets are at risk are, obviously, not ideal. This article will explore the differences between corporate and personal tenancies, how personal tenancies differ from personal guaranties, and general step-downs when negotiating personal liability with your landlord.

Considering Your Vehicle: Personal Tenancies vs. Corporate Tenancies. Understandably, a very common choice vehicle for your tenancy is often your name and yourself personally – why not? It seems like the obvious choice. But, it’s important to understand that the vehicle within which you carry your lease can vary – other options are available beyond holding a tenancy under your own name and designation. Specifically, you can, should your landlord agree, enter into a lease as a corporation to limit the personal consequences described above. The corporate vehicle provides you with greater privacy, permits you to separate your personal assets from business assets and, more importantly, from your obligations under your lease agreement. Ultimately, holding your tenancy within a corporation insulates you and your personal net worth, should the business fail and an event of default becomes inevitable.

Personal Guaranties vs. Personal Tenancies. Often, the terms “personal tenancy” and “personal guaranty” are used interchangeably. However, consider the following examples:

Example: A lease held personally: Amanda Black, D.V.M.

Example: A lease held within a corporation: Amanda Black Veterinary Clinic Inc.

Example: A personal guarantee: Amanda Black Veterinary Clinic Inc., with a personal guarantee provided by Amanda Black

It’s important to understand that these concepts may be considered differently – a personal tenancy can be considered a lease vehicle while a personal guarantee can be considered lease insurance for the benefit of the landlord.

Corporate Tenancies and Personal Guaranties:

Ensuring that a tenant pays rent on time is obviously a matter a landlord takes seriously – but it’s an obligation that is, very often, unsecured. Therefore, while there are indeed options to how your tenancy can be held, a corporate vehicle isn’t a right nor are you automatically entitled to it – tenancies held under a corporation very often accompany some sort of personal guarantee.

Consider Amanda’s case – Amanda is a brand-new graduate, fresh out of veterinary school, taking over a practice location where she’s virtually unknown to the landlord, without an established reputation in her profession (yet), and who hasn’t built up a reputation of reliability with her landlord. Commercial landlords ultimately strive to protect their own interests. Meaning, should Amanda request to hold her tenancy under Amanda Black Veterinary Clinic Inc., it would be entirely unsurprising for her landlord to consider and request some sort of security, in the event that Amanda the New Grad defaults on her lease – such as the personal guarantee. When requiring the personal guarantee from Amanda, the landlord therefore has some semblance of insurance and further recourse against Amanda personally, should her business not proceed according to plan – Amanda would therefore still be personally responsible for defaults in rent despite the corporate vehicle she wishes to hold her tenancy in.

On the other hand, consider Danny the Veteran – he has occupied his space for over 20 years, with a lease held under Danny Green, D.V.M. He has always paid his rent on time, and is, by all accounts, a very reliable tenant with steady flow of business. His lease comes up for renewal this year, and he puts forward a request to transfer his lease to a corporate vehicle, Green Veterinary Clinic, Inc., for both tax and liability reasons. From a commercial landlord’s perspective, when considering reliability, financial consistency, and trustworthiness – Danny the Veteran seems like a safer bet in comparison to Amanda the New Grad, when it comes to ensuring that the risk of default is minimal. In Danny the reliable Veteran’s case, there is certainly likelihood that the request to strike personal liability may be accepted because Danny the Veteran has proven himself to be a party the landlord can rely on.

Landlord Negotiations and Your Protections

Personal guarantees are not an insignificant matter. By signing one, you put your own personal net worth at risk. A saving grace for Amanda the New Grad (or, newer veterinarians or tenants in general) is that leases are certainly negotiable. While it’s common for landlords to request a personal guaranty, there are still several avenues of protection which could, certainly, lead to the ideal circumstance: a lease held within a corporation, with a personal guaranty that isn’t required or entirely struck.

There are several step-downs that can be offered during your lease negotiation. For example, setting a time limit to your guarantee may be offered (Example: Amanda Black Veterinary Clinic Inc., with a personal guarantee provided by Amanda Black for the first two years of the lease term only). Negotiations may also include setting a limit to your guarantee amount (Example: Amanda Black Veterinary Clinic Inc., with a personal guarantee provided by Amanda Black for an amount up to, and not exceeding, $80,000).

The Right to Distrain

Keep in mind, however, that a corporate vehicle doesn’t protect you from blatant acts of wrongdoing nor does it protect you for default. No, it isn’t a free for all.

In specific states and provinces across North America, the right to distrain in favor of landlords does indeed exist (and, unfortunately, reinforces the requirement of personal guarantees). Consider the case where Danny the Veteran, with a lease under Green Veterinary Clinic, Inc. and without a personal guarantee, unfortunately and surprisingly defaults on his lease. Depending on the laws in your state or province, landlords do indeed have the ability to collect on their rent by pursuing the assets and goods of the tenant – and, should Danny the Veteran, in a panic, clear out his assets from the premises without his landlord’s knowledge, some states or provinces provide the landlord with the right to pursue damages from the tenant, for even up to double the value of the goods and assets removed from the premises by Danny.

It’s therefore important to understand that shell corporations do not necessarily make you invincible and untouchable. Danny the Veteran, as tenant and business owner, still has the obligation to fulfill the obligations his business agreed to in a binding contract.

Conclusions

There are various vehicles in which personal obligations may arise in a commercial leasing context. Overall, be aware of your options, its consequences on your business and taxable liability, limits you can negotiate to your personal liability, and the protections you have available, should you demonstrate yourself to be a viable candidate for a lease held within a corporate vehicle.

Cirrus Consulting Group has had many years of experience negotiating with landlords on a variety of issues. Consider hiring professional negotiators to create a properly structured lease agreement for you, discuss your options with respect to your lease vehicle and personal liability, and help ensure the success of your property and your veterinary clinic.

About the Author

Barbara de Dios, B.A. LL.B | Legal Counsel, Canadian Dental Services

Barbara de Dios is Corporate Counsel at Canadian Dental Services Corporation. Prior to joining CDS, she worked as Associate Lawyer at Cirrus Consulting Group, working on behalf of clients across North America in connection to the review, drafting, and negotiation of commercial lease agreements in various states and provinces. She has also worked as associate counsel for a capital markets and investment company based in downtown Toronto, specializing in corporate governance and general corporate/commercial law, where she also previously completed her articles. Barbara graduated from the University of Toronto and earned her legal degree from the University of Birmingham. She was called to the Ontario bar in September 2016.

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